The Finance Act 2023 was enacted on 26th June 2023. The Act amended Section 16(1) of the Income Tax Act and section 23A of the Tax Procedures Act 2015, providing electronic tax invoices for all taxpayers. Effective 1st January 2024, any expenditure or loss where the invoices of the transactions were not generated via an electronic tax invoice management system shall not be allowed for deduction against revenue unless the transactions have been exempted from tax.
This amendment means that each expenditure made by all registered taxpayers must be accompanied by the required Electronic Tax Invoice Management System generated invoice. This provision includes taxpayers not registered for VAT, but are registered for turnover tax, monthly rental income, partnerships, corporation tax and individual income tax (including non-residents with a permanent establishment in Kenya).
Implementing the Electronic Tax Information Management System (E-TIMS) is expected to play a pivotal role in strengthening compliance and sealing revenue leakage for the Kenya Revenue Authority. Through integration with (E-TIMS), businesses will benefit from real-time invoice transmission providing accuracy in tax invoice declarations, verification of expenditure, pre-filled VAT returns, the transmission of invoices to KRA, and reconciliation between filed returns and payments.
The exemptions from E-TIMS include the following;
- Non-resident suppliers of digital services
- Employment income
- Interest income
- Investment allowances
- Imported goods, and services
The onboarding of taxpayers onto E-TIMS marks a significant step towards a more technologically advanced, user-friendly, and efficient tax administration system, benefiting both taxpayers and the tax authorities. Taxpayers will be required to fill in the E-TIMS commitment form and make an application for the preferred E-TIMS software. Taxpayers will be required to choose one software option at any given time before KRA officers process the applications and conduct some due diligence through a Know Your Taxpayer (KYT) interview to determine the software option suitable for the taxpayer and facilitate the approval process of the preferred software. The KRA officer will then schedule a date and time to install, configure, and train the taxpayer on how to use the E-TIMS software for purposes of invoicing.
Please note that expenditures not supported by E-TIMS complaint invoices will not be recognized as deductible expenses to offset as input VAT and corporate tax assessment. In light of this, businesses should transact only with E-TIMS-compliant suppliers thus disenfranchising non-compliant businesses. Small businesses within the informal sector (Boda Boda, Mama Mboga, Kiosks) may not cope well with the technology and the prohibitive fines that have been proposed in cases of default.
Under the Finance Bill, 2023 traders who do not issue electronic tax invoices to customers are likely to be fined either Sh1 million or 10 times the amount of tax due, whichever is higher.